Binding nominations v reversionary pensions
We hear these terms thrown around a lot when it comes to SMSF’s. But what do they really mean?
For many individuals, their super represents a significant part of their total wealth. With that in mind, unlike your personal assets, your super doesn’t form part of the estate. In the event of your death, your member balance must be paid to your ‘dependants’ or your estate.
Under the Superannuation Industry (Supervision) Act 1993 (SIS) your dependants are:
- your Spouse
- your children (regardless of age)
- anyone who is financially dependant on you
- anyone with whom you have an ‘interdependency relationship’, and
- legal personal representative.
It is important to be aware that in the event of your death, your super must be paid out as soon as practicable. As your super fund is controlled by its Trustee, in the event of your death the trustee has absolute discretion as to who receives your death benefit. However, one way to remove a trustee’s discretion is to provide instructions to the trustee on how your death benefit is to be dealt with.
A binding death nomination is a legal document that provides instructions to the ‘Trustee’ as to how your benefits will be paid or distributed. Most importantly it is a legal instruction that specifies which SIS dependants will receive the death benefit and in what proportion.
With a valid nomination in place, these dependants can receive the death benefit as a lump sum. Some SIS dependants will also have an option to receive the death benefit as an income stream. Receiving the death benefit as an income stream will allow the dependant to commence a new income stream on your death. A death benefit income stream is not able to be paid to children over the age of 25 (other than those with a permanent disability) and must be paid as a lump sum.
Binding nominations may be more suitable when you want to give your SIS dependants the flexibility to decide whether they want to receive the death benefit as a lump sum or an income stream. A binding nomination is also more appropriate when you want to nominate more than one SIS dependent and should your circumstances change, you are able to update your nomination according to your wishes.
If you have started to draw a Pension from your super, you may wish to complete a reversionary beneficiary nomination. Usually reversionary nominations are made at the time the pension commences however if the fund rules permit, may allow for a pension to be altered to be reversionary without stopping and recommencing the pension.
A reversionary pension nomination allows you to incorporate various terms and conditions to your pension that the trustee must follow. In the event of your death, your pension will automatically continue to the nominated person. This person is known as your ‘Reversionary Pensioner’.
As some binding nominations can be lapsing or you can easily forget to update your nomination when your circumstances change a reversionary nomination may be more suitable. A reversionary nomination will provide greater certainty that the nominated beneficiary will receive an ongoing income stream (provided that the beneficiary is an eligible dependant at the time of death). With the reversionary nomination in place, the beneficiary doesn’t have to make choices at the time of mourning and the funds are retained in the concessionally taxed super environment. For the beneficiary who plans to receive the benefit as an income stream, this ensures that the money is not mistakenly taken out as a lump sum.